We need more redistribution

Income inequality as measured by the Gini coefficient rose by about 36% in the 1980s under Thatcher, but the real story is the share of income that goes to people at the very top:

According to Greg Mankiw … in the United States the 1%’s share of total income, excluding capital gains, rose from about 8 percent in 1973 to 17 percent in 2010. Between 2010 and 2015 it’s risen from 17% to 22%!!

It’s incredibly concentrated even among the super-rich. The top 0.01%’s share of national income – this is just 16,000 people in a country of 330 million – rose from 0.5% in 1973 to 3.3% in 2010 to 5% in 2015. Their share of income quadrupled in just 35 years …

Just giving people money is fine if you don’t mind them playing video games all day – but many people themselves would tell you that they don’t have the willpower to go back to school or find new work, even if they could do so in theory.

There’s a big role for government to direct investment towards these places, using the money we’ve taken from the winners from globalisation, either to support private industry or just set up our own industries to employ people the private sector won’t …

The super-rich are eating a bigger and bigger slice of the pie, for no good reason, and there are lots of things we could use that money for to make ordinary people’s lives better.

Mainstream economics textbooks usually refer to the interrelationship between technological development and education as the main causal force behind increased inequality. If the educational system (supply) develops at the same pace as technology (demand), there should be no increase, ceteris paribus, in the ratio between high-income (highly educated) groups and low-income (low education) groups. In the race between technology and education, the proliferation of skilled-biased technological change has, however, allegedly increased the premium for the highly educated group.

Another prominent explanation is that globalization – in accordance with Ricardo’s theory of comparative advantage and the Wicksell-Heckscher-Ohlin-Stolper-Samuelson factor price theory – has benefited capital in the advanced countries and labour in the developing countries. The problem with these theories are that they explicitly assume full employment and international immobility of the factors of production. Globalization means more than anything else that capital and labour have to a large extent become mobile over country borders. These mainstream trade theories are really not applicable in the world of today, and they are certainly not able to explain the international trade pattern that has developed during the last decades. Although it seems as though capital in the developed countries has benefited from globalization, it is difficult to detect a similar positive effect on workers in the developing countries.

There are, however, also some other quite obvious problems with these kinds of inequality explanations. The World Top Incomes Database shows that the increase in incomes has been concentrated especially in the top 1%. If education was the main reason behind the increasing income gap, one would expect a much broader group of people in the upper echelons of the distribution taking part of this increase. It is dubious, to say the least, to try to explain, for example, the high wages in the finance sector with a marginal productivity argument. High-end wages seem to be more a result of pure luck or membership of the same ‘club’ as those who decide on the wages and bonuses, than of ‘marginal productivity.’

Mainstream economics, with its technologically determined marginal productivity theory, seems to be difficult to reconcile with reality. Although card-carrying neoclassical apologetics like Greg Mankiw want to recall John Bates Clark’s (1899) argument that marginal productivity results in an ethically just distribution, that is not something – even if it were true – we could confirm empirically, since it is impossible realiter to separate out what is the marginal contribution of any factor of production. The hypothetical ceteris paribus addition of only one factor in a production process is often heard of in textbooks, but never seen in reality.

When reading mainstream economists like Mankiw who argue for the ‘just desert’ of the 0.1 %, one gets a strong feeling that they are ultimately trying to argue that a market economy is some kind of moral free zone where, if left undisturbed, people get what they ‘deserve.’ To most social scientists that probably smacks more of being an evasive action trying to explain away a very disturbing structural ‘regime shift’ that has taken place in our societies. A shift that has very little to do with ‘stochastic returns to education.’ Those were in place also 30 or 40 years ago. At that time they meant that perhaps a top corporate manager earned 10–20 times more than ‘ordinary’ people earned. Today it means that they earn 100–200 times more than ‘ordinary’ people earn. A question of education? Hardly. It is probably more a question of greed and a lost sense of a common project of building a sustainable society.

Since the race between technology and education does not seem to explain the new growing income gap – and even if technological change has become more and more capital augmenting, it is also quite clear that not only the wages of low-skilled workers have fallen, but also the overall wage share – mainstream economists increasingly refer to ‘meritocratic extremism,’ ‘winners-take-all markets’ and ‘super star-theories’ for explanation. But this is also highly questionable.

Fans may want to pay extra to watch top-ranked athletes or movie stars performing on television and film, but corporate managers are hardly the stuff that people’s dreams are made of – and they seldom appear on television and in the movie theaters.

Everyone may prefer to employ the best corporate manager there is, but a corporate manager, unlike a movie star, can only provide his services to a limited number of customers. From the perspective of ‘super-star theories,’ a good corporate manager should only earn marginally better than an average corporate manager. The average earnings of corporate managers of the 50 biggest Swedish companies today, is equivalent to the wages of 46 blue-collar workers.

It is difficult to see the takeoff of the top executives as anything else but a reward for being a member of the same illustrious club. That they should be equivalent to indispensable and fair productive contributions – marginal products – is straining credulity too far. That so many corporate managers and top executives make fantastic earnings today, is strong evidence the theory is patently wrong and basically functions as a legitimizing device of indefensible and growing inequalities.

No one ought to doubt that the idea that capitalism is an expression of impartial market forces of supply and demand, bears but little resemblance to actual reality. Wealth and income distribution, both individual and functional, in a market society is to an overwhelmingly high degree influenced by institutionalized political and economic norms and power relations, things that have relatively little to do with marginal productivity in complete and profit-maximizing competitive market models – not to mention how extremely difficult, if not outright impossible it is to empirically disentangle and measure different individuals’ contributions in the typical team work production that characterize modern societies; or, especially when it comes to ‘capital,’ what it is supposed to mean and how to measure it. Remunerations do not necessarily correspond to any marginal product of different factors of production – or to ‘compensating differentials’ due to non-monetary characteristics of different jobs, natural ability, effort or chance.

Put simply – highly paid workers and corporate managers are not always highly productive workers and corporate managers, and less highly paid workers and corporate managers are not always less productive. History has over and over again disconfirmed the close connection between productivity and remuneration postulated in mainstream income distribution theory.

Neoclassical marginal productivity theory is obviously a collapsed theory from both a historical and a theoretical point of view, as shown already by Sraffa in the 1920s, and in the Cambridge capital controversy in the 1960s and 1970s.

When a theory is impossible to reconcile with facts there is only one thing to do — scrap it. And start redistributing!

5 Comments

The reason for the extreme incomes in Sweden can be seen in last years income distribution white paper(?) Fördelningspolitisk redogörelse from the Swedish Guvernement. https://www.regeringen.se/497a3d/contentassets/fd1d180b97a8433aae8fe491176571a9/bilaga-2-fordelningspolitisk-redogorelse.pdf Diagram 2.2 There you can see how capital gains rises and becomes as big as profits and rents together, in the topmost percentile. This years white paper lacks that distinction.
I’m not certain if it is an statistic artefact, but the gain in percent of the total sum of income in decentile 10 from capital gains is exactly the sum of the losses in the other deciles summed. Its a transfer to the richest from everybody else. Probably a munch comes from the rising prices and bigger loans on housing.

Aren’t you dealing with a pie that is growing for all but growing much faster for the top, because of money creation in the private sector? The growing pie stays at 100% and thus the income shares make it look as if all the gains of the top earners come from the others, but if the pie is growing ever larger due to financial sector money creation, the bottom will show a decline in income share while not actually losing income in real terms.

My assumption is that the official statistics do not measure the full extent of holding gains. Certainly in the US, holding gains are left out of official income statistics. Then there are the offshore accounts that are untaxed and unmeasured. My guess is that accurate measures would show a massive increase in money supply that no standard model can accommodate without breaking. So the inequality is much greater even than official statistics imply, but most of the new money is being conjured out of thin air and derivatives not taken from other deciles. Some appropriation of course occurs but the bulk of the gains of the rich come from new privately-created money.
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I’m reminded of a passage from Emanuel Derman:
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“Most derivative securities are nonlinear: their prices vary disproportionately to the prices of their underlyers. Therefore, it’s very hard to have good intuition about how a derivative’s price responds to changes in the prices of its underlyers. Traders need models to augment their intuition, to interpolate from the linearly changing underlyer prices to the nonlinearly varying prices of the derivative securities.”
.http://emanuelderman.com/the-principles-practice-of-verifying-derivative-prices/
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Translation: mortgage payments are multiplied when securitized and the securities become bid up in financial markets. The credit stays in circulation indefinitely. But the official measurements ignore the money because including it would explode current inflation models.

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